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Gilt Groupe's Kevin Ryan: What Works, And Doesn't Work, in Flash Sales

The online retail pioneer explains why he stepped down as Gilt CEO, and offers his predictions for the fate of the much-hyped industry.
Kevin Ryan spoke about "hirer's remorse" at the Inc. 500 Conference in 2011.
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In the world of flash-sale sites, Gilt Groupe remains one of the largest: Last year online shoppers purchased $600 million worth of clothing, trips, and home décor from the New York-based company, often at steep discounts.

During the past year sales grew 20 percent, but the company also cut costs; it laid off 10 percent of its workforce, shuttered several offices of its local deals site, Gilt City, and closed its full-priced menswear shop Park & Bond as it sought to break even.

In December, Kevin Ryan, the company's founder and chief executive, announced he would step aside and become chairman, making way for Gilt board member Michelle Peluso, Citigroup's former head of marketing and Internet, who will take over as CEO at the end of February.

Inc. senior writer Burt Helm recently spoke with Ryan about his future with the company and the fate of flash sale sites. Below are edited excerpts from the conversation.

Gilt Groupe is replacing you as CEO. When did you realize that running the company wasn't something you could do or wanted to do?
My situation is very unlike anyone else's. I have three companies, and Gilt's only one of them. I started Business Insider. It is one of the largest online business publications in the world. I have another company called 10Gen, it's a database company that's a competitor to Oracle and MySql. Eighteen months ago it had 20 employees. Today it has almost 200.

It's no secret that in the next year, maybe two, Gilt goes public. I only work three days a week on Gilt right now. You can't go public spending three days a week at the company. I had to really cut back or hire a CEO.

The board was not planning on making a change. I went to the board and said, 'Look, I'm going to need to do this.'

Was that always the case, that you spent three days a week running Gilt since you started as CEO?
It changed all the time. At first I was spending 40 percent of my time. Then the company started growing quickly, and I made the decision to sell two of the companies we had, ShopWiki and Panther Express, partly to free up more time to focus on Gilt. When I sold those I got to the point where I could free up 80, 85 percent of my time. Since [my] other companies have grown up, and gotten more scale, then my time has been eaten up, because there's more to do on the other companies.

What were your priorities for hiring Gilt's new CEO?
Gilt is in a pretty good situation, and it's very stable, so I don't need someone to make radical changes. I wanted a great manager. I wanted someone with an Internet background as opposed to a fashion or retail background. I want someone who felt comfortable in a start-up environment but could manage at scale. I want someone who can hire great people, motivate them, keep them, and manage them so they're happy. If your 20 most senior people in the company are really excited, doing well, and working well with each other, the CEO doesn't have to do quite as much.

What is the current state of the flash sale business?
The conventional wisdom two years ago was that flash sale sites were skyrocketing. The conventional wisdom now is it can't be doing that well. In both cases it was wrong.

People are thrown off because of Groupon's numbers. But [Groupon] does daily deals, a subset of the flash-sale space. They have unique challenges. E-commerce has been around for 20 years. Out of the independent companies that do e-commerce, Amazon.com is by far the largest, Overstock is still the second-biggest, and the number two, three, four, five, and six companies are all flash-sale sellers. Those four companies--us, Rue La La, Haute Look, and Zulily--are all doing somewhere between $300 million and $700 million in gross revenue. Flash-sale sites are growing profitably, and it's a huge sector. It's doing incredibly well.

Are there rules of what works in the flash sale site model, and what doesn't work?
Absolutely there are some rules. One, it's got to be a big vertical. Lot18, a wine site, [which recently got out of the flash sales business] struggled. The problem is wine sales online are not that big. In e-commerce, scale is very important. If you're not getting to $200 million to $400 million in sales, I'm not sure you're going to make it. The fixed costs--contracting to buy product from the brands, photographing the products, and putting them online--are too great to sell small lots of products. Gilt's categories are big categories. Women's is by far the biggest category. Kids is slightly smaller category, and home is a big category.

There's one other rule. If flash sales are not your only business, you're not going to make it. When department stores like Saks have a flash sales area, they do some sales on it but it's not going to be a big part of what they do. When you think of Saks, you don't think of flash sales.

Would you say the converse is true? Last summer you closed full-priced menswear site Park & Bond--your attempt to be like Saks.
The same is true. In most of our categories, if it's not a special offer, consumers aren't super excited. The one exception was Jetsetter, where we sell full-priced travel, which today is more than 50 percent of Jetsetter's business. But it didn't work, or rather, it's not huge in other categories.

You've said you want to take the company public in the next two years. It's been reported that other sites have similar plans. What is it about the next two years makes it the right time for flash sale sites to go public?
To go public you want to be profitable, and a certain size. It has nothing to do with flash sales.

In May 2011, when you raised $138 million in funding, you told Women's Wear Daily that Gilt had 125 open positions, and several full-time recruiters doing nothing but hiring. Seven months later you laid off 10 percent of your workforce and shifted the conversation to profitability. What happened?
Two separate things. What always happens in the business is on an ongoing basis you're expanding in one area and finding efficiency in others. We're not cutting back overall. We started the year at 900 people. We laid off 90 people, and we've since hired over 200, so we've net added 100. We installed an accounting system a year ago that took a bunch of people to do, and once we did it, we needed fewer people. In 9 months we're installing a purchasing system that tracks all the inventory and costs $3 million. We have 11 full-time engineers working on it, when it gets installed we'll save 15, 20 jobs.

Is there room now for new products or business lines in flash sales?
Look, I think the rate of innovation has slowed. All of us have been thinking about flash sales for awhile now--can I do this for men's only? Can I do it for pets? There are some smaller opportunites you might be able to do, and maybe I'm underestimating how big those categories are, but my guess is they are smaller.

You've said in the past you wouldn't enter a flash sale market unless it could reach $50 million in revenue in two years. Is that still your thinking?
Roughly, yeah. Things I talked about in the past were things like pets. But even if you buy a lot of stuff for your dog, would you check dog deals two, three times a week? There are only so many things you can buy for your dog. Whereas there are women and some men who do look [for themselves] two to three times a week and buy a lot. That narrows it down. I've purchased 360 items personally in our men's area, and there are a hundred more people who buy more than me.

Paint me a picture of how you see us shopping a year from now, or two years from now.
It's not radically different. More mobile, more online, our business will keep growing at 20 percent a year but these are big numbers now. These are like adding $40 billion in e-commerce every year. Amazon will get a big piece, the flash sale sites get a piece, some of the traditional retailers get a piece, and some start-ups get a piece, and then more of that goes onto mobile. It's becoming more personalized. That's particularly important for flash sales companies. When you go to Amazon, you go because you want to buy a specific book. On Gilt, you don't know what's on sale. Our skill must be figuring out what you like. On Gilt already there are many sales that are shown to me, but not to you, because of our preferences, but there are not enough. We and a lot of the other players are going to be doing a lot of work there.

This article was originally published on February 15, 2013. It was updated to correct Gilt's 2012 revenue growth to 20 percent. 

IMAGE: Inc.
Last updated: Feb 15, 2013

BURT HELM | Staff Writer | Senior Writer

Burt Helm is a senior writer for Inc. magazine.




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